Glimmers of hope for long-term investors

15-year fund review: Glimmers of hope for long-term investors

The latest Financial Post 15-year fund statistics may present a somewhat discouraging picture for long-term investors, but the good news is that they are largely ancient history. Although it’s been a choppy ride, there have been signs of improvement.

Returns from Canadian equities overall, for example, sank -32.3% in 2008 but rebounded 31.5% in 2009 and another 14.2% in 2010, then sank -8.8% in 2011 but gained 7.0% last year. U.S. equities overall returned 10.0% last year, a far cry from the 15-year average annual compound return of 0.5%. Similarly, international equities returned 14.5% last year, European equities returned 17.7%, and even the long-suffering Japanese equity category managed a positive return (5.6%) in 2012. And of course, hundreds of equity funds managed double-digit returns last year, compared with just 15 over the long term.

On the other hand, as if to underscore their inherent volatility, the long-term leaders — precious metals and natural resource fund categories — saw their 15-year returns eroded with a dismal 2012 in which they averaged -15.3% and -8.4% respectively. And of course, with interest rates now having been at rock-bottom levels for four years years, Canadian fixed-income funds managed only a 3.0% return in 2012.

So what do all these figures augur going forward?

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As a purely mathematical phenomenon, the long-term equity figures should improve as the effects of the high-tech bubble fade. Meanwhile, the loonie seems to have reached a plateau, giving added impetus for foreign fund returns. And certainly fixed-income returns won’t re-attain their long-term heights anytime soon, given interest rates have nowhere left to go but up. Beyond that, though, few experts are willing to hazard many guesses as to future investment market trends.

“It’s all largely dependent on the global recovery,” says William John, vice-president at Phillips, Hager & North Investment Management in Vancouver. “We’ve been through a tremendous crisis, one that’s not been seen before in generations. There’s still a lot of risk, and tremendous uncertainty.

Luc de la Durayante, first vice-president, asset allocation and currency management at CIBC Global Asset Management Inc. in Montreal, agrees that the future is hard to predict, and that the U.S. and European situations are central to any global economic resurgence. “Many countries have been using unconventional monetary policies and soon they’ll be asking how to get out of these policies, so it’s unusually difficult to project what will happen.

“We’re seeing some healing in the world economy — the U.S. has tackled its debt problems and Europe has developed a framework for resolving their debt problems,” Mr. Durayante says. “But the question remains: Will we see enough growth to grow our way out of all that debt? We’re not extremely optimistic, but the emerging markets will soon represent half the world’s economy and may easily achieve growth rates of 5% to 6% or more. They import a lot from developed countries so that will help around the edges.”

In the meantime, Mr. Durayante suggests diversification back into foreign markets. “We think now is a good time to take advantage of the strong Canadian dollar and diversify. Based on our research, the Canadian dollar is overvalued by 10% to 12%, and while the Canadian market won’t necessarily go down, we think the outlook is less positive than the U.S. or the [European Community]. So we do think it’s time to look outside Canada for both equities and fixed income investments.”

Given the low rates being offered by most central banks, though, and the unlikelihood of any change in that scenario for a while, Robert Pemberton, head of fixed income at TD Asset Management in Toronto, suggests corporate rather than government debt. “We see fixed income total returns in the 1% to 3% range, and current interest rates will be the best approximation of returns for a considerable period of time,” he says. “In the current environment, corporate debt is a more predictable place to add value, with yields double what you could get with government bonds.”

Matthew Ardrey, consultant and manager of financial planning at T.E. Wealth in Toronto, also sees the U.S. and Europe as the biggest risks to renewed global growth. “The U.S. has to get its act together on debt and stop the political grandstanding,” he says, but adds: “They’ve seemed more conciliatory lately.

“Secondly, there’s Europe,” says Mr. Ardrey. “If they go into a mild recession, that will probably be okay on a global scale, but if the European Union breaks up it will send a huge shockwave throughout the globe. They’re one of China’s biggest trading partners so they’ll be affected, and there will be a domino effect around the world.

“Those are the two big risks,” Mr. Ardrey concludes. “Of course, we could always be blindsided by something else such as, for example, if the Iran/Israeli conflict were to flare up.”

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